Corporate Derivatives and Ownership Concentration: Empirical Evidence of Non-Financial Firms Listed on Pakistan Stock Exchange

Abstract

Risk management has been gaining tremendous fame for the last couple of years. Firms in developed and developing countries are facing a variety of risks, i.e., foreign exchange risk, interest rate risk, commodity price risk, and equity risk. It calls for such hedging techniques that mitigate this risk level, thus, allowing corporations to enjoy a solid return. This paper draws attention to a new determinant of hedging, i.e., the role of ownership concentration in risk management using derivative instruments. For this purpose, a sample data of 101 non-financial firms listed on the Pakistan Stock Exchange (PSX) for six years, ranging from 2010-2016, is used. The Mann-Whitney test for difference in users and no-users is applied along with logistic regression to check the effect of ownership concentration on derivative usage. The finding of this study reveals that concentrated owners are less likely to use derivatives for hedging purposes due to concentrated owners' interests (top five shareholders & largest shareholder, family owners). Whereas, executives are more likely to engage in the use of derivatives to increase the value of their stocks. However, associated companies are significantly less involved in hedging activities. These results are extremely advantageous for policymakers in corporations to create a more stable corporate environment.

Are Family Firms Financially Healthier Than Non-Family Firm?

“…Furthermore, Asghar Butt et al (2018) add that most family owners are less likely to use derivatives for hedging purposes as compared to non-family owners. Examining corporate derivatives and the ownership concentration of 101 Pakistani non-financial firms over the period 2012-2016, they concluded that non-family firm are more likely to use derivativemeasures to increase the value of their stocks.…”

Firm Size and Age mediating the Firm Survival-Hedging Effect: Hayes’ 3-Way Parallel Approach

“…Firm survival, as implied in SGT, is the "conscious destruction" of strategies that have not served the firm's ability to withstand competition both within its immediate market and the global market environment [59,60]. The subtle adoption of better strategies which lead to the creation and development of new ideas which are consequential to meeting new demands implies, therefore, that a firm has high survival ability [48,54,61,62].…”

Foreign Exchange Risk Hedging, Corporate Governance and Financial Performance: Evidence From Kenya

“…Using 265 non-financial firms listed on FTSE-All share index for the period from 2005 to 2012, the regression analysis revealed that, corporate governance has a strong influence on the hedging decisions undertaken to deal with financial risk exposure. Butt, Nazir, Arshad, and Shahzad, (2018) sought to assess the role of ownership concentration in risk management using derivative instruments. The study used a sample of 101 non-financial firms listed on the Pakistan Stock Exchange (PSX) for the period between 2010 and 2016.…”

“…The target population comprised of all the 54 firms that were continuously listed on NSE during the study period from 2011 to 2016. The selection of the period was guided by previous studies on foreign exchange risk hedging and firm performance like (Butt, et al, 2018). Since the study used all listed firms, sampling was not necessary.…”

“…Large outsider block holders tend to monitor managers' actions; thus, the presence of large outsider block holders should result to a positive relationship between hedging and financial performance of the firm value. However concentrated ownership like a high ratio of family ownership with highest control were less likely to use derivatives for hedging purposes due to concentrated owners' vested interests (Butt, et al 2018). Table 4.4 above shows that the average board size of these firms had nine members, ranging from 4 to 15 on overall for each entity year.…”